- The Bank of England has cut the base rate from 5.25% to 5%. The rate had held for a year
- The committee voted 5:4 for a cut
- Inflation has held at 2% for 2 months, although it is expected to rise to 2.75% in the second half of the year
- Why the bank opted to cut
- What this means for investors
- What this means for savings
- What this means for annuities
- What this means for the property market
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“The Bank of England was as split as the rest of the market has been over whether a rate cut makes sense this month. In the end, a cut squeaked through for the first time since the onset of the pandemic. The fact the vote was split 5:4 goes to show how tough the decision was.
In the end, the MPC was swayed by the fact that inflation held at 2% for a second consecutive month. It’s expected to rise back to 2.75% later this year, but that’s thanks to energy price movements a year earlier, and the Bank has always been less worried by inflation that’s driven by energy prices alone.
It’s more concerned about ‘secondary effects’ – so how inflation caused by energy price changes goes on to impact the wider economy. It is taking falling wage inflation and lower services inflation as a sign that some of the pressure here is easing.”
What this means for investors
Steve Clayton, head of equity funds, Hargreaves Lansdown:
“It’s not safe to assume this is the first cut of many. In its statement, the Bank of England said there are still inflationary risks, so while it decided a slight reduction in rates was appropriate, it went nowhere near suggesting that significant and sustained cuts are on their radar screen yet.
Traders were already leaning toward the view that a quarter point cut in rates would be announced, with money-market rates implying a sixty percent chance of rates dropping to 5% and sterling was trading around $1.277 ahead of the Bank’s announcement, around 0.8 US cents lower on the day. With the market hearing roughly what it expected to hear, sterling made little move in response to the cut.
Markets now have to work out what the Bank’s statement means for the medium term. The UK money-markets are predicting a series of cuts, taking rates below 4% over the next three years. That will require more evidence that inflationary forces are clearly weaker before the Bank, judging by today’s language, makes much more of a move.”
What this means for savings
Mark Hicks, Head of Active Savings, Hargreaves Lansdown:
“A rate cut is never going to be music to the ears of savers, but this shouldn’t do too much damage. The market was split on whether we were going to get a cut, so decisive action from the Bank of England is going to mean some banks bring rates down slightly, especially among easy access accounts, but we’re not expecting massive movements.
However, what really matters for fixed rates, both now and in the coming months, is what happens around expectations of rate cuts in the future. If the Bank of England decides to cut rates twice and then pause, we should see minimal disruption to the savings market. More consistent rate cutting of four or more would drive greater savings rate change.
Longer-term savings rates give the clearest indication of where the market expects things to settle, and with 3-year and 5-year fixed savings rates at 4-4.5%, the market is currently not predicting any significant falls below these levels.
At the moment, the highest easy access rate and one-year fixed rate accounts still pay over 5%, so savers can still beat inflation by an impressive margin. The highest easy access rate on HL Active Savings is 4.67% (AER) and the highest fixed rate is 5.06% (AER). When you add in the effect of the current cashback deal, this takes it to 5.26% (AER).
If you don’t need the cash for a while, fixed term rates offer the best returns from a risk reward perspective, so it’s worth securing a rate by considering a fixed rate deal while these rates last. You can check online banks and cash savings platforms which tend to have more competitive rates.”
What this means for annuities
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:
“Annuities have enjoyed a sustained period of high incomes off the back of interest rate hikes, and today’s cut could see them start to fall back. Data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,217 per year from a single life level annuity with a five-year guarantee. This is up 46% from the £4,943 available just three years ago. Income falls off the back of today’s decision are not guaranteed but their prospect could be enough to persuade those who are yet to commit to a guaranteed income to finally take the plunge.
It’s fair to say we are unlikely to see annuity rates go into freefall. They escalated quickly as interest rate increases came thick and fast. We are expecting the Bank of England to move far more slowly when it comes to cutting rates so any decrease should be gradual. If you are in the market for an annuity, then it’s important to make sure you get the best rate – don’t just take the rate offered by the first provider. Use an annuity search engine to cover the whole market and you may find yourself thousands of pounds better off over the course of your retirement.”
What this means for the property market
Sarah Coles
“This is great news for roughly half a million homeowners who have a rate that tracks the Bank of England, with average savings of around £28 a month.
If you have a fixed-rate deal, it’s going to have less of an impact. Even if you need to remortgage in the near future, this cut isn’t going to spark seismic changes in the market. It was already priced in, so movement will be relatively minimal. The market has also priced another cut in 2024, so although we expect rates to be on a downwards trajectory, we’re not expecting anything major.
It means remortgaging is going to come with some pain. The HL Savings & Resilience Barometer shows that one in five of those who have had to remortgage onto a higher rate since the end of 2022 have just £315 left at the end of the month – £95 less than those who are yet to remortgage
However, there is good news. Those who have yet to remortgage are likely to be on slightly higher rates than those who have done so since 2022 – and they’re remortgaging onto rates that are down from the peak. Those who remortgage in the next six months or so are likely to be moving from a rate of 2%-2.5%, and right now there are deals available for less than 4%
It means the jump in rates is going to be painful, but they don’t have quite the same gap to clear as those who remortgaged before them – who faced a rise from less than 2% to more than 6.5% in some instances.
The cut will have an impact on the property market quite aside from mortgages. It’s likely to boost sentiment – which is central to the health of the property market. It could persuade more buyers that this is the right kind of market to take a leap of faith and buy.”
